Keeping score of the US-China ‘trade war’

Keeping score of the US-China ‘trade war’

Some months ago, in an interview on Classic FM, I noted my scepticism on whether the trade disagreement between the US and China should be called a trade war. At that point the US was rolling out its increased tariffs on steel and aluminium, save for on products from eight select allies at the time. Following the US-China bilateral talks in May it seemed like the disagreement could be navigated– given enough time both parties could walk away happy. However, in the past month, the US has continued to push to implement further measures.

As it stands the US has implemented tariffs on steel (25%) and aluminium (10%), affecting imports from almost all of the rest of the world, and has followed through with its decision to impose tariffs on an additional $50 billion worth of Chinese products. Following the US’s implementation of steel and aluminium tariffs, China (and other major trading partners) retaliated with tariffs of their own. China also retaliated against the US’s tariffs on $50 billion worth of imports with their own set of tariffs on $34 billion worth of American imports with an additional $16 billion in imports to be targeted.

On July 31st President Trump threatened to increase the proposed 10% tariffs on the additional $200 billion worth of Chinese imports to 25%. Beijing’s response was to reveal more than 5,200 US-manufactured products that are earmarked for new levies. Bilateral negotiations have continued, but a breakthrough seems some way off with just a few days left until the implementation of the $200 billion worth of tariffs. A detailed chronicle of the tit-for-tat can be found here (Financial Times paywall).

Tariff battles with China aside, the US is fighting trade fires on multiple fronts. The Trump administration is planning to give $12 billion in emergency aid to US farmers hurt by trade tariffs, primarily as a result of trade partner retaliation to US tariffs. The US is also being left out of trade agreements it used to be linked to, like the 11-member Asia-Pacific trade agreement (TPP), further weakening its commercial influence and soft power.

As for the US’s traditional trade partners, the conversation with the EU is primarily around the difference in tariffs on a small range of agricultural goods as well as passenger vehicles and light trucks. Tensions between the EU and US have, however, decreased as a grander trade deal between the two has been mentioned following high level engagements. It is safe to assume we won’t see a progressive agreement like the previously proposed TTIP anytime soon. As for the US’s neighbours, Canada and Mexico, the renegotiation of NAFTA is currently on hold as Mexico adjusts to the results of their July general elections.

As we stand on the cusp of an enormous amount of old school protectionism it is worth reflecting on my assessment of the situation only a few months ago. Would I now call the US’s unilateral stance and subsequent partner retaliation a trade war? Still not just yet. The US’s 232 and 301 investigations made their objectives clear; what issues they have with regards to national safety (however veiled that might be) and specifically what problems they have with China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation as well as how they intend to remedy the situation. It’s also worth noting that the US is not alone in this. China on the other hand, has made it clear that they wish to honour the commitments following the May bilateral talks, but to date none of the talks have resulted in any material agreement. With the US’s midterm elections looming, it is unlikely a deal will be reached before end-August and that the next round of tariffs will come into effect on 1 September.

Will we see more tariffs beyond the current set of recommended tariffs? Probably, and if the US and China push for interventions beyond the second round of tariffs and counter tariffs on the proposed $200 billion worth of imports, I will then concede we are in a trade war.

There are some limiting factors to what both sides are capable of in the near term. China is fast approaching their import tariff limit with regards to the range of products they import from the US. China’s latest announcement brings the estimated value of trade threatened by Chinese tariffs to $110bn out of $130bn worth of goods China imported from the US last year. The US on the other hand, still has some room to target imports for tariffs as their interventions (implemented and proposed) on Chinese products stands at $250bn out of a total of $505bn worth of Chinese imports. The US is heading into their midterm elections, meaning all seats in the House of Representatives and 35 seats in the Senate will be up for grabs, and the administration will have to answer for disruptions, albeit short term, in the US agriculture states. Domestic political threats are not something that General Secretary of the Communist Party of China, President of the People’s Republic of China, Chairman of the Central Military Commission, Xi Jinping, really has to worry about.

The escalating trade battles leave small open economies, like South Africa, in a bad position where global value chains get disrupted and foreign suppliers and consumers are worse off due to the increased prices of inputs and outputs, which in turn means less money is available to import from and invest in foreign countries. The global risk appetite is also decreasing with each round of tariffs and counter tariffs driving capital away from emerging markets to the relative safety of the US. Some opportunities might open up where South Africa can fill the market gaps in the US and China, but if the tariff increases are sustained the net wealth loss will eventually dry up export markets. Value chain disruptions aside, if the US and China continue to push for higher tariffs, effectively ‘closing off’ their trade markets, large scale trade diversion of US and Chinese exports might push smaller traders out of other markets.

It is hard to predict the impact on a country like South Africa from the actions of the US and China. The more direct threat for South Africa is the prospect of being graduated from AGOA. AGOA eligibility is tricky as beneficiary status may be granted or withdrawn at the discretion of the US President, effectively giving Donald Trump a giant stick to wave at its beneficiaries. With the chicken wars reigniting, due to a number of failed attempts to have South Africa excluded from the section 232 tariffs on steel and aluminum products, we’re likely to see more pressure on South Africa’s continued participation under AGOA. With the midterms on the horizon in the US, the possibility of making an example of South Africa seems even more likely. Finding a way through these challenging trade times is going to require strong efforts by both the South African Government and private sector that pull in the same direction. It will only be with a united approach that we can be prepared for the impact in these uncertain times.